Lay Summary (Englisch)

Lead

Lay summary

In recent decades, the world has seen dramatic changes in economicinequalities, both within and between countries. Several population-richcountries have experienced unprecedented economic growth and hithertounknown prosperity for sizeable parts of their populations. In China, India,Brazil, and other countries large middle classes have been emerging,creating huge new consumer markets with a high export potential for the restof the world. Dramatic increases in inequality have also taken place withinindustrialized countries, with more polarized income distributions anderoding middle classes, particularly in the U.S. but also in other richeconomies. These trends have generated dramatic changes in the globaldistribution of purchasing power, both within and across countries.

This project will study the implications of these large and changingeconomic inequalities for the pattern and volume of international trade. Thebasic approach of our project aims to extend the existing literature in twoways. First, our focus is on the distribution of economic resources among world citizens. This is different from the majority of the existingliterature that emphasizes the distribution of economic resources across nations and abstracts from within-country inequality. How do the newand growing middle classes in emerging markets affect the pattern ofinternational trade? How will rising inequalities within rich countriesaffect trade structures and trade volumes? How will trade liberalizationsaffect the poor and the middle classes in the developing and the developedworld? Our approach allows investigating such potentially important issuesthat cannot be (easily) addressed within the standard frameworks ininternational economics and macroeconomics. Second, on a more general basis,we explore economic inequality as a potentially important determinant oftrade outcomes. This focus is quite different from a long tradition ininternational economics that has been exploring the opposite chain ofcausality: the impact of international trade on factor prices and theresulting inequality in the distribution of income among households withincountries or among representative factor owners across countries.

Our project is both theoretically and empirically oriented. On the theoretical side, we aim to contribute to and extend the recent theories ofinternational trade in two ways. The main focus of our theoretical projectswill be to explore the implications of economic inequalities through thechannel of non-homothetic preferences. Our basic framework emphasizesthe extensive margin of consumption choices and builds upon empiricallyrelevant consumption patterns: rich households consume more types of goodsthan poor households. This framework is rich enough to address theinteresting questions mentioned above. Yet it is simple and tractable enoughto cover a broad range of related issues such as trade and growth, thequality and variety of trade, and international product cycles. A secondcontribution of our project explores how income and wealth inequalitiesaffect trade flows through the channel of imperfect capital markets. Here our goal is to contribute to the growing literature that explores towhich extent a country's financial development explains its economicintegration. While this literature explores the importance of access tocredit, only very few papers have looked at how this interacts with incomeand wealth inequalities.

On the empirical side, we will extend the existing literature by astrong focus on structural modeling. For decades, the empiricalanalysis of the determinants of bilateral or multilateral trade has focusedon reduced-form empirical models, mostly along the lines of the so-calledgravity equation. In our analysis we intend to go beyond this empiricaltradition and take more seriously the opportunities arising from structuralempirical analysis of general equilibrium models of income inequality andbilateral trade.

Inequality and Globalization: Demand versus Supply Forces and Local Outcomes

01.05.2015

Sinergia

Abstract

In recent decades, the world has seen dramatic changes in economic inequalities, both within and between countries. Several population-rich countries have experienced unprecedented economic growth and hitherto unknown prosperity for sizeable parts of their populations. In China, India, Brazil, and other countries large middle classes have been emerging, creating huge new consumer markets with a high export potential for the rest of the world. Dramatic increases in inequality have also taken place within industrialized countries, with more polarized income distributions and eroding middle classes, particularly in the U.S. but also in other rich economies. These trends have generated dramatic changes in the distribution of purchasing power both within and across countries around the globe.This project will study the implications of these large and changing economic inequalities for the pattern and volume of international trade. The basic approach of our project aims to extend the existing literature in two ways. First, our focus is on the distribution of economic resources among world citizens. This is different from the majority of the existing literature that emphasizes the distribution of economic resources across nations and abstracts from within-country inequality. How do the new and growing middle classes in emerging markets affect the pattern of international trade? How will rising inequalities within rich countries affect trade structures and trade volumes? How will trade liberalizations affect the poor and the middle classes in the developing and the developed world? Our approach allows investigating such potentially important issues that cannot be (easily) addressed within the standard frameworks ininternational economics and macroeconomics. Second, on a more general basis, we explore economic inequality as a potentially important determinant of trade outcomes. This focus is quite different from a long tradition in international economics that has been exploring the opposite chain of causality: the impact of international trade on factor prices and the distribution of income across factors of production within countries or across representative factor owners across countries.Our project is both theoretically and empirically oriented. On the theoretical side, we aim to contribute to and extend the recent theories ofinternational trade in two ways. First, the main focus of our theoretical projects will be to explore the implications of economic inequalitiesthrough the channel of non-homothetic preferences. Our basic framework emphasizes the extensive margin of consumption choices and builds upon empirically relevant consumption patterns: rich households consume more types of goods than poor households. This framework is rich enough to address the interesting questions mentioned above. Yet it is simple and tractable enough to cover a broad range of related issues such as trade and growth, the quality and variety of trade, and international product cycles.A second contribution of our project explores how income and wealth inequalities affect trade flows through the channel ofimperfect capital markets. Here our goal is to contribute to the growing literature that explores to which extent a country's financial development explains its economic integration. While this literature explores the importance of access to credit, only very few papers have looked at how this interacts with income and wealth inequalities.On the empirical side, we will extend the existing literature by a strong focus on structural modeling. For decades, the empirical analysis of the determinants of bilateral or multilateral trade has focused on reduced-form empirical models, mostly along the lines of the so-called gravity equation. In our analysis we intend to go beyond this empirical tradition and take more seriously the opportunities arising from structural empirical analysis of general equilibrium models of income inequality and bilateral trade.